U.S. Ally Abu Dhabi Levels $4 Billion Fraud Charge Against Citigroup

Robert Rubin, Former Treasury Secretary and Citigroup Board Chair

By Pam Martens: September 5, 2012

According to a confidential cable published by Wikileaks, the U.S. Embassy in Abu Dhabi sent a communication to the U.S. Secretary of State and U.S. Treasury on December 22, 2009, alerting them to the fact that the investment arm of a U.S. ally, Abu Dhabi, believed it had been defrauded of $4 billion by Citigroup (Wall Street’s serial miscreant and recent ward of the taxpayer). The cable relayed that William Brown, legal advisor to the Abu Dhabi investment arm, “unequivocally stated that Citi ‘lied’ and must be held accountable.”

Three years later, Abu Dhabi has likely figured out that in the U.S., gangsters have guns but banksters are far more dangerous – they have ivy league educated lawyers. One group of lawyers writes the prospectuses that defraud investors; another group writes the contracts that bar these cases from ever seeing sunshine in a public courtroom; and the third group provides skillful white color criminal defense, including a speed dial to their pals in Washington, ensuring that justice will be as elusive as a Wall Street CEO clad in orange.

A three month search of records, that have not yet been sealed or redacted, show that Abu Dhabi landed in the same plundered status as public pension funds and small time investors in Citigroup, while a very special Group of Six reaped a windfall.

It all started with a handshake from a former U.S. Treasury Secretary. On Monday, November 26, 2007, four days after Thanksgiving, Robert Rubin was standing in one of the most spectacular waterfront buildings in the Middle East – the headquarters of the Abu Dhabi Investment Authority. With two finger-like wings, the gleaming building showcases an atrium soaring 40 stories into the sky.

Rubin, a former Co-Chairman of Goldman Sachs, whose lavish pay at Citigroup since leaving Treasury in 1999 had reached $120 million for eight years of non-management work, had more than architecture on his mind that day. He had reluctantly agreed to serve as interim Chairman of Citigroup after the company had earlier that month forced out its Chairman and CEO, Chuck Prince, following spectacular losses and a sinking share price. Rubin was on a critical mission to secure a $7.5 billion lifeline for Citigroup.

The deal had been reviewed the prior week by the Abu Dhabi Investment Authority’s Strategic Investments Team, headed by Sanjeev Doshi, a graduate of the University of Pennsylvania. Due to fog, the Abu Dhabi team could not fly to New York on November 20, and opted instead for a video conference to quiz the heads of Citigroup’s businesses on November 21. Robert Rubin was now on hand to shake hands with the Managing Director of the Abu Dhabi Investment Authority, Sheikh Ahmed Bin Zayed Al Nahyan, and close the deal.

The Abu Dhabi Investment Authority, universally known as ADIA, is a sovereign wealth fund that invests the kingdom’s surplus cash. It came through on its end, wiring $7.5 billion into a Citigroup bank account a few days later.

Citigroup is a publicly traded company, whose shares in 2007 were held in the largest public pension funds in America and in mutual funds held in rank and file employees’ 401(k) plans across the country. This $7.5 billion investment from ADIA was going to convert in a little over two years into approximately 235 million publicly traded common shares of Citigroup stock, diluting all other shareholders. Despite these facts which called for maximum transparency, Citigroup entered into multiple secret contracts involving this investment, including a November 24, 2007 Confidentiality Agreement and a November 26, 2007 Investment Agreement with ADIA.

All of the details of those secret agreements have not come to light, but what has emerged is that a core part of the agreements involved the fact that ADIA, like Citigroup’s own workers, would have no access to the public courts of the United States in the event of a dispute. All claims, including claims of securities fraud, would be forced into an arbitration system where Wall Street lawyers, whose firms had client relationships with Citigroup, would end up serving as judge and jury. An additional, mind-numbing requirement, was that ADIA would not be allowed to hedge its $7.5 billion investment, despite the fact that Citigroup had just reported massive losses, lost its Chairman and CEO, and was under regulatory scrutiny for off-balance sheet debt held in the Cayman Islands in Structured Investment Vehicles.

According to the portion of ADIA’s documents that are public in Federal Court, ADIA says it was induced into investing the $7.5 billion through representations by Citigroup that “it would not bring certain Structured Investment Vehicles (SIVs) onto its balance sheet, or raise significant additional capital after ADIA’s investment…Citigroup then promptly did exactly the opposite of what it had said. On December 13, merely ten days after obtaining ADIA’s critical investment, Citigroup announced that it would bring the SIVs onto its balance sheet. Within the next month, Citigroup wrote off $18.1 billion in subprime losses, and raised a further $20 billion in capital…All of these actions flatly contradicted what Citigroup had just told ADIA, diluted ADIA’s investment in Citigroup, drove down Citigroup’s stock price, and harmed ADIA.”

When the $7.5 billion investment was announced on November 26, 2007, business media was given the bare bone details by Citigroup, making it sound like a very simple deal. Citigroup’s press release explained where the $7.5 billion was going this way: “Each Equity Unit is mandatorily convertible into Citi shares at prices ranging from $31.83 to $37.24 per share. The Equity Units convert to Citi common shares on dates ranging from March 15, 2010, to September 15, 2011, subject to adjustment. Each Equity Unit will pay a fixed annual payment rate of 11%, payable quarterly.”

In reality, the deal was a Byzantine entanglement that took 38,000 words in an SEC filing and involved a forward purchase contract, four trusts held by the Bank of New York, junior debt, the ability to suspend the 11 percent interest payments, and multiple secret side contracts that now reside under seal in the U.S. District Court for the Southern District of New York.

On January 15, 2008, less than two months after allegedly promising ADIA it would not raise additional capital, Citigroup announced it had arranged a $12.5 billion investment of convertible preferred securities that could convert into common stock. The deal included two billionaire investors. The reason this would outrage ADIA (and all other shareholders) is that a company’s earnings are spread over a given amount of common shares. Those earnings impact the share price as well as whether there will be funds to pay or increase dividends; the more shares outstanding, the more dilution of earnings to existing shareholders.

Matt Miller and Vipal Monga, writing for The Deal, reported the breakdown of that $12.5 billion investment as follows: Government of Singapore Investment Corporation (GIC) led with $6.88 billion; the Kuwait Investment Authority (KIA) kicked in $3 billion; Capital Group of Companies, owner of the popular American Funds, invested $1.75 billion; Saudi Prince Alwaleed bin Talal bin Abdul Aziz al Saud, who had previously bailed out Citibank (predecessor to Citigroup) in the early 90s, added $450 million; the New Jersey Division of Investment put in $400 million; and former Citigroup chief Sandy Weill tossed in $20 million.

Both Prince Alwaleed and Sandy Weill are billionaires; Weill having made his fortune receiving obscene pay at Citigroup as its Chairman and CEO. In just one year, 2000, Weill cashed in $196.2 million in stock options and received a bonus of $18.4 million. His total take in just a five year period: $785 million. Weill is also the man most responsible for the repeal of the depression era Glass-Steagall Act, forcing Congress to bulldoze the legislation by illegally merging his Travelers Group with Citicorp in 1998, a combination of insurance, stock brokerage and insured deposit banking not allowed at the time under either Glass-Steagall or the Bank Holding Company Act of 1956. As Treasury Secretary, Rubin helped muscle through the repeal of Glass-Steagall and then took his high paid post at Citigroup shortly thereafter.

Weill stepped down as CEO in 2003 and as Chairman in 2006. But he continued to serve as an Advisor to Citigroup. According to a Fortune magazine interview, Weill was meeting with Prince Alwaleed in Riyadh, Saudi Arabia in mid November 2007, just weeks before ADIA signed its deal. Whether Weill was attempting to raise additional capital is unknown. What is known is that Weill got in, for a very tiny stake, on what turned out to be the investment coup of the decade – a coup that left small investors, along with ADIA, suffering massive losses.

After the January 15, 2008 investment of $12.5 billion by the Group of Six, things got worse at Citigroup, with losses spiraling out of control. On October 28, 2008, the U.S. government’s Troubled Asset Relief Program (TARP) extended capital assistance to 9 banks, with Citigroup receiving $25 billion.

But by the week of November 17, Citigroup was in full blown meltdown, with its stock losing 60 percent in five trading sessions. The stock closed the week at $3.77. The company’s market value had gone from $250 billion in 2006 to $20.5 billion by the close on Friday, November 21, 2008. That was $4.5 billion less than the U.S. government had invested less than a month before. At that point, the U.S. government could have bought the entire firm for $20.5 billion or at the very least received a majority stake, kicked out the derelict management, and ensured taxpayers safe passage on Wall Street’s Titanic.

Instead, according to the official report from the Special Inspector General for TARP, here’s what happened next. On the morning of Thursday, November 20, 2008, Treasury Secretary Hank Paulson and New York Fed President Timothy Geithner held a conference call with Fed Chairman Ben Bernanke, FDIC Chair Sheila Bair, and Comptroller of the Currency John Dugan (a former bank lobbyist) to discuss Citigroup.

The next day, Friday, November 21, 2008, the New York Fed convened a conference call with Citigroup officials. During this conversation, the Fed reported that it became clear that liquidity pressures had reached crisis proportions (think Lehman Brothers). According to the report, the New York Fed “requested that Citigroup submit a proposal for additional Government assistance, without specifying the details of what Citigroup should include in the proposal.”

Late on Sunday evening, November 23, 2008, after four days of what the Fed and Treasury refer to as “Citi Weekend,” the monster funding package was announced. The government was going to guarantee a toxic asset pool at Citigroup up to $306 billion (later reduced to $301 billion). In addition, the government would provide another lump sum of $20 billion in capital. According to the Special Inspector General of TARP, he could find no “documentation of the decision-making process behind the $20 billion capital injection.”

In total, including TARP and other government lending programs, Citigroup received $45 billion in capital, $301 billion in asset guarantees, and $2.513 trillion in loans from the Federal Reserve between December 1, 2007 through July 21, 2010, according to the Government Accountability Office.

The stunner came on March 18, 2009. Citigroup announced that the Group of Six was going to be allowed to exchange their convertible preferred stock for 3.846 billion shares of common stock, massively diluting the value of ADIA’s shares and all other common shareholders. ADIA’s investment of $7.5 billion was 60 percent of the $12.5 billion the Group of Six had put up, but the Group of Six was receiving 16 times more shares than ADIA.

It had the appearance of a shove-down. Not only were common shareholders taking a financial beating, but as Citigroup quietly noted in its SEC filing, they were not even being allowed to vote on the exchange offer. Citigroup applied for and received a waiver on the voting action from the New York Stock Exchange.

The math on this is as follows: When the deal with the Group of Six was announced on January 15, 2008, Citigroup closed the trading day at $26.94. When the new deal with the Group of Six was announced on March 18, 2009, the stock closed at $3.08 – a decline of 88.6 percent from January 15, 2008. But this Group of Six, unlike public pension funds, 401(k) accounts, IRAs, long-term small shareholders, did not take an 88.6 percent haircut. They were exchanged at only 5 percent less than their original investment. Here’s the math: 3.846 billion shares at $3.08 = $11,845,680,000 versus original investment of $12.5 billion = 5.2 percent decline.

To put the trade in even clearer perspective, there is one document that slipped through the seal-o-matic machine. Sandy Weill has a family trust and that’s the account in which he made the January 2008 deal. Because it’s a nonprofit, it has to file an IRS 990 tax return. That document is publicly available. Here’s how Weill made out on the deal: he invested $21,226,848. Between September 2009 through December 1, 2009, he sold out his position for a profit of $6,226,847. That’s a 29 percent profit in less than two years.

Today, Citigroup might look like it has recovered to a price in the double digits. Don’t be fooled. Last year, the company did a 1 for 10 reverse stock split. For every 10 shares that an investor previously owned, they now had just one. That allowed the stock price to increase by 10 to 1, making it appear to the unwary as if the company had made significant progress. In reality, long-term shareholders have lost over 90 percent of their value in Citigroup since 2007.

Requests to the U.S. Treasury office for an explanation as to why this lopsided deal was allowed to take place, while the government was a major owner, were met with silence, despite being initially promised a response.

When Abu Dhabi was making its deliberations as to whether or not to invest in Citigroup, the SEC knew that Citigroup was not coming clean on its dangerous exposures to subprime debt. Kevin Vaughn, an SEC branch chief, had written to Citigroup on October 23, 2007 to put the firm on notice: “We note your response to our prior comment 2 in our letter dated July 3, 2007 in which you state that you did not disclose the amount of mortgage backed securities and residual interests collateralized by non-prime mortgages held by U.S. Consumer due to immateriality. From your disclosures in your Forms 8-K filed on October 15, 2007 and October 1, 2007, it appears that you do have a material exposure to non-prime instruments as these instruments caused you to record a $1.56 billion loss in the third quarter.”

Vaughn was grilling the firm about many other issues with its balance sheet but it is impossible to know exactly how much misstating was going on at Citigroup because the SEC has adopted the position that Citigroup can request, and receive, redaction of the material that it does not want to make public. Pages 23 through 36 of this document have been totally redacted – with the words “Confidential Treatment Requested by Citigroup,” – while much of the rest of the information requested by Vaughn earlier in the document is also redacted.

Situations such as this explain why the average investor has no confidence in Wall Street. Citigroup is a publicly traded company. It was engaging in fraudulent reporting. But we, the investing public, can’t know the details because Citigroup doesn’t want us to and its regulator, the SEC, doesn’t have a problem with that.

The balance sheet misstatements led to more redactions and sealed documents when a whistleblower from inside the SEC wrote an anonymous letter to the Inspector General of the SEC saying that the Enforcement Director, Robert Khuzami, backed off fraud charges against Citigroup executives because he got calls from his former lawyer pals who had been hired by Citigroup. The Inspector General hung out the dirty linen but did not make a finding of wrongdoing on the part of Khuzami.

The SEC settled the case of misreporting for a pittance compared to other Wall Street fines despite a finding that Citigroup was telling the public it had $13 billion in subprime exposure when it actually had in excess of $50 billion.

Tomorrow, in Part II, we’ll look at the kangaroo court Abu Dhabi Investment Authority entered in the U.S. in May 2011– a country that dares to boast “Equal Justice Under Law” on the front entrance to its highest court. Instead of a randomly appointed judge and a jury of one’s peers that have been voir dired to weed out conflicts of interest, ADIA’s claims were tried in a secret arbitration proceeding where two members of the three-member arbitration panel worked for law firms where Citigroup was a client. One arbitrator had even previously served as counsel to Citigroup.

Adding to those seemingly insurmountable headwinds, Sheikh Ahmed Bin Zayed Al Nahyan, Managing Director of ADIA, would not be able to give first hand testimony to the tribunal as to what Robert Rubin and other Citigroup executives had promised him. In the same month, March 2010, that ADIA was to make its first payment to buy Citigroup common stock at a price almost 10 times where it was trading, the Sheikh crashed to his death in a glider and wasn’t found for four days.